The move by Northwest Airlines and KLM Royal Dutch Airlines to cease paying commissions to online travel sites has far reaching implications. Does the predatory move mark the end for online travel sites?
Earlier this month, both airlines notified online travel sites that they would cease the payment of commissions. Previously, Northwest paid 5% (capped at $US10) for sales generated through third party web sites. The move is driven by the results of market research that found that airlines sold more tickets through their own websites than through online travel sites.
Clearly the key variable is whether other airlines will move to cut commissions to online travel agents in the short term.
If all airlines follow Northwest and KLM`s lead, then it is estimated that online travel sites will lose around 25% of their revenue base. To guard against the potential revenue loss, Travelocity.com now imposes a $US10 service fee on all Northwest and KLM tickets.
In making up the revenue shortfall however, Travelocity are discouraging their customers from flying with KLM and Northwest. Clearly KLM and Northwest sales are hurt, and if other airlines don`t follow suit Northwest and KLM are disadvantaged over the longer term. If such is the case, then Northwest and KLM have effectively destroyed a potentially lucrative sales channel.
In the case that other airlines do cut commissions to online travel sites, other means of doing business need to be sought. Passing the cost on to the consumer is one option, however it plays into the hands of the airlines pursuing a direct model. Another way to make money is in the wholesale business, whereby a block of seats are bought on a particular destination for a certain price and then onsold to consumers at whatever the price the travel agent can get. The disadvantage here is that the online travel site is taking on the risk that not all tickets will be sold.
In Australia the market is very different to that of the US. Richard Noon (CIO, Concord International Travel) says that the American travel industry is very focussed on domestic, with 90% of ticket sales attributable to local routes. By contrast, Noon says the Australian market is made up of 50% international and 50% domestic. This is a significant fact as the higher percentage of international travel introduces additional complexities from a technology perspective.
Our local market consists of few pure plays - with travel.com.au the exception rather than the rule. Rather the market is dominated by traditional discount travel networks, like Harvey Travel and FlightCentre, migrating online. As such, the airlines haven`t clearly distinguished between online and offline sales as yet.
With the launch of special direct sales over the Internet by Qantas and Impulse Airlines (who estimates that it processes 70% of its orders through the Internet), domestic air travel is quickly being shifted to a direct model.
For Australia, the battle is quickly escalating to one between the airlines and traditional travel agencies - with the pureplay sector not even on the radar.